Argentina, Brazil and Mexico's response to the US trade war
Any authority granted to the President by section 1702 of this Act may be exercised to meet any unusual and extraordinary threat, originating in whole or in substantial part outside the United States, to the national security, foreign policy, or economy of the United States, if the President declares a national emergency concerning such threat. United States Code. Chapter 35-International Emergency Economic Powers. § 1701. Unusual and extraordinary threat; declaration of national emergency; exercise of presidential powers.
The law that gives rise to the tariffs used in the trade war has the definition that the President can exercise extraordinary powers (because it is an unusual and extraordinary threat originating outside the US). Interestingly, the US fiscal deficit, whose twin is the external deficit by definition, is caused by the North's low tax burden and high defence spending over time, which has led to its debt growing. As part of defence spending goes abroad to purchase equipment, industrial parts, and pieces, it translates into external deficits. US overconsumption led to twin deficits, financed partly with foreign resources to cover the balance of payments deficit.
The reality is that the US fiscal pressure has been declining over time and that its external deficit has been rising since at least 1990, with the global deregulation that they have been promoting through the international financial organisations and the creation of the WTO to regulate international trade. Washington understood that they were unquestionable winners in the unilateral world and that there would be no cost. In reality, the goal was income concentration.
Graph 1: US fiscal deficit as % of GDP 1990-2024
Source: OBELA with data from FRED.
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Graph 2: US public debt as % GDP 1990- 2024 |
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Source: OBELA with data from FRED. |
The international economic problem of the US must be understood from the theoretical principle that the fiscal deficit is identical to the external deficit and that foreign resources finance the external portion. The current problem is that interest on the debt is the second largest item of public spending, above defence spending and below the largest, which is social security. It is not unusual for the debt to grow when the tax burden falls and public expenditures to go up. That is why the debt grew. It was the members of Congress of the republican party who always lowered taxes, so there is no third party responsible, even less a third foreign party. The external deficit is the mirror of this. The US government's proposed solution to its fiscal problem has been to impose tariffs on the world, as in the 19th century.
In this context, on 2 April 2025, President Trump announced his policy of reciprocal tariffs. The term “reciprocal” implies others have tariffs against US goods, which is mistaken and misleading. Its fiscal problem is home made. Non the less, he imposed a universal base tariff of 10%, including on products within free trade agreements (such as the one with Chile and Peru), and imposed higher rates on some countries, such as China. Although the US Government paused the entry into force of the latter for 90 days -some time in May- the region's main economies have reacted. This article will discuss the different measures taken by Brazil, Argentina and Mexico.
Latin American countries have not been passive recipients of Trump's policy. Brazil, for instance, has openly opposed Trump's policy and is actively seeking to strengthen its trade relations with Asia. Argentina, on the other hand, is strategically seeking a free trade agreement with the US and, with the approval of an IMF loan, is aiming to strengthen its relations with Washington and disengage from China. Mexico, in its own strategic move, has remained on the sidelines to defend the T-MEC.
When faced with Washington's policies, Brazil did not hesitate to take proactive measures. President Bolsonaro, for instance, suspended the visa requirement in June 2019, only to have President Lula reestablish it for Americans. President Lula also passed the Trade Reciprocity Law, which allows tariffs on imported products that affect Brazilian competitiveness or come from countries that impose trade barriers.
Lula da Silva has confronted Trump's policies and defended multilateralism, inviting Mexico, Uruguay and Colombia to participate in the upcoming BRICS summit. He also travelled to Asia, where he visited Japan and Vietnam, intending to seek new trade alliances.
The main points discussed in Japan were speeding up the authorisation of beef exports to the Japanese market and cooperation on biofuels. In Vietnam, both countries developed a strategic partnership framework; the Asian country is a member of the Association of Southeast Asian Nations (ASEAN) and also a partner of the BRICS, which could be an ally for improving relations with these countries. They expect Brazil to facilitate a trade agreement with MERCOSUR.
In addition, on 22 April 2025, he visited Chile, where he met with President Boric. The President signed thirteen agreements on fisheries, agriculture, livestock, AI, public security, and infrastructure projects. He highlighted the bioceanic corridor Capricornio that would connect the Brazilian ports of São Paulo, Paraná and Santa Catarina with the Chilean ports of Iquique, Mejillones and Antofagasta.
President Milei expressed his desire to achieve a free trade agreement with the US in Argentina. The first is Article 1 of MERCOSUR's Asunción treaty, which does not allow member countries to negotiate bilateral trade agreements without the approval of the others. Given this, Milei has raised the possibility of withdrawing from the South American agreement. The second is that the US is clearly against free trade.
In April 2025, the IMF approved a loan to Argentina of USD 20 billion to remove restrictions on foreign exchange purchases, and it is not likely to allow Argentina to negotiate SWAPS with China when the one renewed in 2025 for 35 MMRMB in mid-2026 expires.
Mexico has negotiated so that products in the T-MEC will not pay the reciprocal tariff. For goods not covered by the agreement, a 25% tariff will be applied, which may be reduced to 12% when the so-called "state of emergency" caused by the migration crisis and fentanyl trafficking, problems for which Trump says the Mexican government is largely to blame, ends. The 25% tariff on steel, aluminium and automobiles that do not qualify as originating in the T-MEC is maintained; if they are considered part of the T-MEC, they will only pay 25% on the value of the non-North American parts.
Despite the challenges and the extortion exercised with the stationing of US army troops on the Texas border, Mexico has shown resilience. In response to the force presented, there has been the deployment of 10,000 members of the National Guard along the country's northern border, the surrender of 29 drug lords and numerous seizures of fentanyl and other drugs. The Mexican President, in a show of resilience, avoided reciprocal tariffs to prevent an inflationary impact when President Trump announced the steel and aluminium tariffs. After the 2 April 2025 announcement, she stressed that Mexico would not apply new tariffs, and was optimistic about what she called "preferential treatment".
Mexico's actions and stance have been sufficient to contain Trump's provocations. Among other things, this includes the mass deportation of Mexican citizens from that country. As we have already seen, there are 40 million citizens of Mexican origin in that country. Trump also reminded that the "International Water Treaty of 1944", which involves the delivery of more than 1,520 million m3 of water, is not being complied with. In her conference on 29 April, Dr Sheinbaum stated that the water debt would be paid within its scope due to the country's drought, mainly in the northern region. The White House accused Mexico of dumping tomatoes, so in July 2025, it will apply a 20.91% tariff on tomatoes yet 90% of tomatoes consumed in the US are imported from Mexico. The Mexican government has not planned a solution to this.
In conclusion, for Mexico, tariffs are an extortive threat, and for the rest of the world, they are a reality. Trump's discourse loses force whenever the US government backtracks or systematically postpones the danger. They have not achieved their tariff revenue collection objective for April, as since their application, they have generated only a quarter of the expected income. What the US Government has achieved is to antagonise the world.
